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Solar-for-coal swaps emerging as new tool for retiring coal in energy transition


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Solar-for-coal swaps emerging as new tool for retiring coal in energy transition

Solar-for-coal swaps are emerging as yet another path to moving power generators away from coal economically, according to a new research brief from Energy Innovation: Policy and Technology LLC.

The organization has released a series of briefs amounting to a growing toolkit of regulatory and financial pathways toward transitioning away from coal. Solar-for-coal swaps are transactions involving third parties in which coal assets are purchased and retired from a regulated utility in conjunction with a new solar power contract.

"The transaction terms include payment for solar power plant output as well as repayment for purchasing and decommissioning coal, and may also include financing for community transition," the report explained. "The underlying motivation for these deals is a combination of consumer preferences, fundamental economic comparisons, and policy pressures to retire coal and replace it with renewable energy."

Multiple studies have concluded that coal generation is quickly becoming less economical than alternative sources of power. Coal production is falling rapidly as domestic coal power plants are being retired at a steady pace. In 2019, U.S. power generators retired 13,863 MW of coal-fired generation, the highest amount of coal capacity retired since 2015 when new mercury regulations drove the retirement of 15,124 MW of coal-fired capacity, an S&P Global Market Intelligence analysis from May showed.

As solar increasingly becomes competitive with coal as part of a fundamental economics shift, consumer pressure to transition to cleaner energy will soon become "relentless," the brief warned.

The report is not based on a theoretical model. Instead, it highlights recent implementations of solar-for-coal swaps, demonstrating that the private sector may be ready to push a transition to renewable energy faster than is broadly expected.

While solar-for-coal swaps can vary in approach, they typically feature an offer to substitute new solar for older coal generation, provide private sector financing, pay the owner of the coal plant, retire the coal plant, and repay the purchase and solar investment through customers' rates. The amount the customer pays is lower due to cheaper solar costs as solar energy replaces coal on the grid, and the original owner cleans up environmental liabilities, the report said.

"New solar facilities provide most of the required replacement power when they are substituted for coal plants, paired with a mix of market-sourced resources to meet reliability requirements," the report explained.

While in principle, utilities can raise and invest capital and carry through the rest of the process of a solar-for-coal swap on their own, third parties are speeding up action in places that may not otherwise be motivated to move as quickly. Utility resistance "is a real barrier to financing the transition away from coal," Energy Innovation's research brief said.

"Monopoly utilities have not done a good job of responding to customer desires for clean energy," co-author Mike O'Boyle said in an interview, comparing the financial transactions to recent pressure from large industrial consumers. "You're seeing large customers with the power, the financial power to do so, continuing to try to find ways to get off of coal before the monopolies are willing to do so. It speaks to the financial risk of continuing to operate these plants in spite of cheaper options being available."

The organization said municipal and publicly owned utilities own 44 GW of uneconomic coal, and solar-for-coal swaps could be particularly beneficial for those entities. They pointed to a 2019 analysis by Vibrant Clean Energy and Energy Innovation that found that roughly 34% of municipal or cooperative-owned coal assets were uneconomic to operate compared to local wind or solar replacement energy in 2018. That figure rises to 59% of coal plants by 2025.

The group highlighted the coal-for-solar swap at the Kit Carson Electric Cooperative Inc. in New Mexico, which paid $37 million to its wholesale power supplier, Tri-State Generation and Transmission Association Inc., to exit its "all requirements" power contract. With the help of financier Guzman Energy LLC, Kit Carson made a deal for solar energy that is expected to save cooperative member-owners $50 million to $70 million despite high exit fees paid to leave the contract.

"Tri State's economic situation could quickly become dire as larger customers depart in favor of lower-cost renewable energy supplies," the report said. "It is not unreasonable to connect these events with Tri State's January 2020 announcement that it will retire its New Mexico and Colorado coal fleets by 2020 and 2030, respectively."

The report also noted that Guzman Energy made a $500 million offer to Tri-State to accelerate the retirement of about 50% of the company's remaining coal fleet. While Guzman promised lower consumer cost and maintained reliability, Tri-State has postponed considering the offer, and Tri-State CEO Duane Highley said in 2019 that its not-for-profit cooperative business model was better suited to meet customers' goals. Highley said continuing that was preferred to "entering into an exclusive agreement with a for-profit energy trader ... that drives financial returns for their hedge fund investors."

"Still, the scale and audacity of Guzman's bid to refinance and retire most of Tri State's uneconomic coal generation fleet show the potential of renewable for coal swaps to scale and meaningfully impact the pace of financial transition from coal to clean," the report said. "Clearly capitalists of the hard-eyed variety are willing to back solar against coal on a large-scale basis, and it is likely other financiers would sponsor this kind of investment."